Guest Interview:

Biondo Investment Advisors

540 Routes 6 & 209
Milford,PA 18337

Interview Quarter: 4Q2006

Joseph Biondo, Jr.

Senior Portfolio Manager

Joseph, please give us
an overview of your company?

Biondo Investment Advisors is a Registered Investment
Advisor located in Milford, PA with approximately $450 million under management.
The core of our business is creating and managing separate account portfolios
for our clients. We also advise The Biondo Growth Fund, a mutual fund that
was launched in May of 2006. Our business operates in two segments –
Private Client Group and Institutional Advisory Group.

Private Clients are those that have a direct relationship with our firm,
whereas Institutional Advisory Clients are introduced to our services
through an Advisor. In both segments, the clients we serve are primarily
Institutions, Endowments, Foundations and High Net-Worth Individuals.

What makes your firm different
from other investment management firms with a similar offering?

I believe that our firm’s culture is our most
identifiable characteristic. We have worked hard to create what we call
a culture of “commitment”, which takes into account our clients,
the consultants who employ our services, our employees and their families,
our community and our industry.

At the core of our business, we have focused on our research process
and our investment discipline. By doing so, we have established a solid
track-record. Beyond that, we have always maintained that putting the
best interests of our clients first has fostered lasting relationships,
which has helped our business to grow.

Since we are an emerging firm and are relatively unknown, we help many
Advisors enhance their own value proposition by introducing a manager
with a superior track record than other, more well-known managers. This
helps the Advisor distinguish themselves from their competitors, who typically
only showcase the well-known managers.

Can you offer an overview
of the different strategies that you manage?

For our Private Client Group, we offer three different
strategies: All-Cap Growth, Moderate Growth and Growth & Income. The
basic difference between the strategies is the level of risk we will assume.
All-Cap Growth is offered as an all-equity portfolio or with a fixed-income
component as well. Moderate Growth and Growth & Income are only offered
as balanced strategies.

The only strategy that we currently offer to our Institutional Advisory
Clients is All-Cap Growth and it is only available as an all-equity portfolio.
We have found this to make a great deal of sense, since the Advisor is
typically allocating the overall portfolio and we are managing just a
portion of that overall portfolio.

Can you give us more detail on
your All-Cap Growth Strategy?

All-Cap Growth is the flagship strategy at our firm.
Essentially, it is growth-oriented and includes companies across the entire
capitalization spectrum priced at what we deem to be reasonable. We have
been managing to this strategy since 1991 and attribute its success to the
flexibility that allows us to follow our research process and find the best
companies, regardless of size, at the best price.

There are some basic
portfolio construction disciplines that we employ in this strategy. We
will never own more than 40 companies in the portfolio, which makes us
more concentrated than a typical manager. We have position limits both
at cost and with appreciation that we follow, so that no individual company
represents too much of the portfolio. We limit our exposure to any individual
sector and to any market-cap segment as well. These rules allow us the
flexibility to go where our process takes us while at the same time removes
the possibility of getting too carried away with any particular company,
sector or market-cap segment.

Do you have plans for
additional offerings to the Institutional Advisory Group?

That will be dictated by our clients and the marketplace.
Our marketing group has found an increased interest in our ability to be
flexible, but style-box investing continues to dominate the landscape. Most
Advisors who employ active managers understand that finding managers that
are able to consistently outperform over the long-term are a rare breed,
so we are having success despite the ability to fit this strategy into one
box.

We do believe that All-Cap Growth has a limit in terms of assets. While
we are not certain where that ceiling is, we have every intention on closing
the strategy at some point in order to preserve the qualities that have
led to its success. In the short-run that may limit our company’s
growth, but that is not our focus.

We have developed a research process that is repeatable and has been
proven to uncover opportunities with companies of all sizes. I am confident
that if we were to launch a large-cap growth portfolio, for example, that
we would be successful. No matter what transpires, our focus remains on
our process and believe that as long as that is true, our business will
take care of itself.

What is GARP and how do
you use it to determine how you invest your clients’ money?

GARP is growth at a reasonable price. Of course,
each of us can have very different interpretations of what is “reasonable”.

We believe that in the long run, prices are driven by supply and demand.
Demand is primarily driven over the long-term by growth in a company’s
earnings. So we focus on companies in businesses that can grow their earnings
at an above average pace and generate cash to return to shareholders either
through dividends or by diminishing supply in the form of share buybacks.
We try not to overpay for such companies because great companies can make
poor investments if you pay too much for them.

This attention to valuation has been the hallmark of our ability to outperform
our benchmark over time. In the bear market of 2000-2002, our valuation
process helped us to avoid many poor investments. It has been our experience
that avoiding major losses is paramount to having a track record of out-performance.

How do you allocate your
investments in different industry sectors?

We spend the majority of our time analyzing
different businesses in many different industries. While our research
process often yields a diverse group of companies across many sectors,
our valuation work is ultimately driving which companies end up in the
portfolios. We have certain portfolio construction disciplines that limit
our exposure in any one sector, but the process usually ensures that we
have a broad representation across industries.

Do these allocations change
with market conditions?

To the extent that market conditions affect valuations,
yes. Again, our valuation process not only dictates what we are willing
to pay for a potential investment, but at what price we may be willing to
trim or sell a position. When valuations get to the extremes, it will most
certainly change our sector weightings.

This is also true with market-cap
weightings. Our process will also dictate where we fall in terms of size
– at times we may be more weighted to small, mid or large companies
and that is driven by valuation. We currently are leaning more toward
large companies because that is where we are finding the most attractive
valuations. This is very different than where we were four or five years
ago.

In a nutshell, how do
you define “value” in regards to an optimum investment?

We define value in an optimum investment to be very
little downside with a great deal of potential upside. That is typically
found in companies with above-average growth potential and below-average
valuation.

To what degree would you
describe yourself as contrarians?

In the traditional sense, I wouldn’t consider
myself a contrarian at all. By definition, a contrarian should do the exact
opposite of what the crowd is doing.

While I strongly believe that the crowd is usually wrong, that doesn’t
always mean that the right approach is to take the exact opposite side
of the debate. Many times, the crowd is wrong in magnitude and not direction.
Let me offer an example:

In 2007, the consensus view is market returns of roughly 7-9%. In my
experience, there is about a 65% chance that this view will be wrong.
If I were a textbook contrarian, I would bet against higher prices, leaving
me in cash or even short.

However, the crowd being wrong doesn’t necessarily mean that returns
will be negative. If the markets advance 15-20%, the consensus view is
still wrong. If I were to take the exact opposite position, I would be
more wrong than the crowd, which in this business does nothing for career
longevity.

All of this said, there are times when it pays to go exactly opposite
the crowd, which we have done, but that does not make me a contrarian.

What measures do you take
to mitigate risk in your portfolios?

Primarily, I believe our best defense is our research
process. In All-Cap Growth, the diversification across companies of different
sizes has helped limit risk. Sector diversification is another important
tool, which is driven by our portfolio construction disciplines. Finally,
our valuation process plays an important role in risk-management.

How do you distinguish
between a company whose stock is undervalued and one that has ongoing problems?

We spend a great deal of time and energy making
the distinction between broken stocks and broken companies.

A broken stock is when a stock has come down in price, for a multitude
of reasons, but which we believe to be temporary in nature. These situations
often yield undervalued securities. A broken company, on the other hand,
may have come down in price, but the reasons may not be temporary. There
are times when industry dynamics change, companies don’t see, prepare
or react to such change, and the result is often an overvalued security
even though it may appear cheap.

We obviously like to invest in broken stocks when we see a potential
catalyst, while avoiding broken companies.

How do you define a company
with a “great franchise”?

We consider companies that develop ways to insulate
themselves from competitive pressures as great franchises. This can come
in a variety of forms, such as patent protection, distribution networks
and new product development. The common thread in great franchises across
all industries is excellent management.

To what degree is the
investment approach an art versus a science?

At our firm, there is a combination of both art
and science to managing money. Our research process is designed scientifically,
but our decision-making is more artistic.

We have three stages to our
process: idea generation, qualitative analysis and valuation. This has
been designed to be repeatable, but not easily replicated. The first step
is a system we have developed to ensure we are constantly evaluating new
ideas, which I would consider science. The next step involves conducting
qualitative analysis, which I would consider art. The final step is figuring
out what we are willing to pay for a specific security, which combines
elements of both.

If you asked which element is more important, I would have to say art.
Without the science, though, there would be a blank canvas.

Would you say you are
bottom up or top down investors?

Again, there are elements of both. While our security
selection process is bottom up, we overlay a top down approach for macro
or sector themes that we may wish to incorporate. The particular companies
that we own will go through our process, so we are primarily bottom up in
those terms.

Do you use any macro economic
theory in trying to determine where the overall market might be heading?

An understanding of macro theory is important, but
not for the reason you mentioned. We really don’t spend a great deal
of time trying to figure out where the overall markets are going because
we invest in companies. In order to determine where we think the overall
market is heading, we rely more on behavioral economics.

There needs to be an awareness of location in the economic cycle, but
that is for determining what types of companies might make sense given
our economic outlook. Our strength has been our focus at the company level
and that is where we spend the majority of our time and energy.

How many companies do
you track overall and how many issues end up in your typical portfolio?

In All-Cap Growth, we begin the process with every
available public security that trades on a US exchange. In the initial phase
of our process, that usually is distilled down to approximately 250 companies
that we analyze qualitatively during the course of a year.
The result is typically 75-100 companies on our active watch list and our
portfolios will have no more than 40 securities.

Are you always invested
or do you ever raise cash to protect from bear markets?

There are times when we trim or eliminate positions
because of valuation and we are not able to find attractively priced alternatives.
In such situations, we will hold cash.

There is an important distinction to make between holding cash and protecting
from bear markets. Our valuation process drives our overall asset allocation.
If we cannot find attractively priced securities, there will be cash in
the portfolio. This worked well for us in the bear market of 2000-2002
when we were able to significantly outperform over that period. It was
our process that drove that, not our guess of an impending bear market.

All of that said, some of our institutional clients have specific criteria
as to the amount of cash we are able to hold at any time, which puts the
asset allocation in their hands. In such circumstances, we try to communicate
with those clients to allow for more flexibility. If they are too rigid,
it may mean that they allocate our cash elsewhere and to other managers.
We will not be invested just for the sake of being invested. If we can’t
find attractively priced investments, we won’t make them.

How do you go about doing
your research?

As I mentioned before, we have three parts to our
research process: idea generation, qualitative analysis and valuation.

The first step is necessary because there are approximately 15-16,000
publicly traded companies that trade on the US exchanges. We have developed
a proprietary, quantitative system that allows us to narrow our focus
on a smaller number of companies on a regular basis.

Next, we conduct our qualitative analysis, and we try to answer three
questions:

1. Is this a business that we want to be in?
2. Do we like this company’s position within their industry?
3. Are the right people running the company?

There are a number of factors that go into answering these questions,
which would require much more of your time to drill down on. We fundamentally
believe that by taking an ownership approach to the business, a thorough
analysis of management is required. I don’t know anyone who would
go into business with someone they didn’t think very highly of or
trust. So that is the approach we take.

The final step is our valuation process, which I mentioned earlier. This
determines whether a specific company ends up in the portfolios or on
our watch list. We have prices that we are willing to pay for specific
securities and prices at which we would be willing to sell these companies.
It is vital to our success to stay disciplined to these parameters.

What are some of the factors
you look at when trying to answer these questions?

First and foremost, we have to like a company’s
growth prospects. We want to find companies that can grow their revenues
and earnings into the future at an above-average rate in comparison to their
industry and to companies in general. We like to find companies that compete
in industries with high barriers to entry, which usually gives them pricing
power. We look for companies that invest heavily in research and development,
that have a focus on new product introduction or product extensions. We
like companies with disposable products and recurring revenue business models.
We typically want to see a track record of management’s ability to
manage growth and we look for management that is focused on creating long-term
shareholder value. We also want to see management with the right incentives
and companies that are structured properly.

What is your typical holding
period?

Our annual portfolio turnover has been about 20%,
which translates into an average holding period of about five years. We
enter each investment with a long-term horizon, but understand the need
to be flexible. If a company we own is delivering on our expectations and
remains attractively valued, we will remain owners.

Can you discuss your sell
discipline?

There are five triggers in our sell discipline:
quantitative deterioration, qualitative breakdown, valuation, violation
of portfolio construction discipline and identification of a superior alternative.

Most commonly, a slowdown in earnings that we do not see as temporary
or do not see a catalyst on the horizon will cause us to exit a position.
If management changes or industry dynamics change, we may sell. If the
valuation becomes too rich, we may trim or sell a position outright. If
a company or a sector grows too large, we may be required to trim or sell.
Finally, since we will not own more than 40 companies at any time, we
may have to sell because we have uncovered a new opportunity and need
to make room in the portfolio.

Discuss the reasons behind
the launch of your Mutual Fund?

When we decided to launch the mutual fund, we thought
it would be an attractive alternative for our Private Client Group. The
fund largely reflects our All-Cap Growth Strategy and allows clients to
participate in our process at a reasonable cost when a separate account
may not be appropriate. We have since discovered that the fund is also a
great supplement to our Institutional Advisory Group offering since it allows
Advisors access for their clients at all account levels.

Please direct us to where
an investor might get more information on Biondo Investment Advisors.